We calculate abnormal stock returns for Japanese non-financial companies around major events associated with the banking crisis (1995–2000), and find that not all companies were equally sensitive to the malaise of the banking sector: the most affected were small, leveraged, low-tech companies with low credit ratings and low market to book ratios. This is consistent with “credit crunch” theories (companies with limited access to financial markets are sensitive to changes in bank lending) and with claims that innovation is rarely financed by bank debt. We do not find much evidence on the alleged misallocation of loans to support ailing bank clients.

Twentieth century Japan provides a remarkable laboratory for examining how an externally imposed institutional and regulatory intervention affects the ownership of corporations. In the first half of the century, Japan had weak legal protection but strong institutional arrangements. The institutions were dismantled after the war and replaced by a strong form of legal protection. This inversion resulted in a switch from Japan being a country in which equity markets flourished and ownership was dispersed in the first half of the century to one in which banks and companies dominated with interlocking shareholdings in the second half of the century.